Every month, a family of three spends $2,000 on food (F) and other items (O). The family’s preferences are represented by the utility function U(F,O) = F1/5O4/5. The unit price of food and the unit price of other items are both $1.a) Find this family’s monthly food expenditure. The family could join a consumers’ club. At the club, food costs 20% less than in other stores (i.e., at the food club PF = $0.8). b) Suppose the club did NOT charge a membership fee: how much money would the family spend on food? How much food would the family buy? c) Would the family be willing to pay more than $80 to join the consumers’ club? Clearly justify your answer.
Every month, a family of three spends $2,000 on food (F) and other items (O). The family’s preferences are represented by the utility function U(F,O) = F1/5O4/5. The unit price of food and the unit price of other items are both $1.a) Find this family’s monthly food expenditure. The family could join a consumers’ club. At the club, food costs 20% less than in other stores (i.e., at the food club PF = $0.8). b) Suppose the club did NOT charge a membership fee: how much money would the family spend on food? How much food would the family buy? c) Would the family be willing to pay more than $80 to join the consumers’ club? Clearly justify your answer.
Micro Economics For Today
10th Edition
ISBN:9781337613064
Author:Tucker, Irvin B.
Publisher:Tucker, Irvin B.
Chapter6: Consumer Choice Theory
Section6.A: Indifference Curve Analysis
Problem 1SQP
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Every month, a family of three spends $2,000 on food (F) and other items (O). The family’s preferences are represented by the utility function
U(F,O) = F1/5O4/5.
The unit price of food and the unit price of other items are both $1.a) Find this family’s monthly food expenditure. The family could join a consumers’ club. At the club, food costs 20% less than in other stores (i.e., at the food club PF = $0.8).
- b) Suppose the club did NOT charge a membership fee: how much money would the family spend on food? How much food would the family buy?
- c) Would the family be willing to pay more than $80 to join the consumers’ club? Clearly justify your answer.
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